The US Eighth Circuit Court of Appeals decided a case yesterday that demonstrates that ethics violations aren’t enough in legal malpractice claims. Greatly simplifying the case, the law firm, Dorsey & Whitney, prepared a package of loans for an investment bank. The investment bank sold the package to 32 independent banks who loaned the money to the Mohawk tribe for casino operations.

There were two problems with the firm’s advice. First, at the time of closing, the National Indian Gaming Commission had not approved the project. The firm told the investment bank to go ahead with the closing anyway.

As litigation cases are want to do, the deal went bad. The banks sued the tribe for the amount due, and the tribe then claimed that the loans weren’t valid because the National Indian Gaming Commission had not given approval. Some of the banks ended up suing the firm. A U.S. Bankruptcy Court and a U.S. District Court both held that the banks were beneficiaries of the legal services, and entered substantial judgments against the firm. In reaching the decision, the bankruptcy court noted:

If Dorsey can escape liability for activities that constitute malpractice in this situation on a standing defense, the integrity of these types of commercial transactions are at risk…It cannot be sued for malpractice by the loan participants because they do not have standing; it cannot be sued by Miller & Schroeder [the investment bank firm] because Miller & Schroeder has no damages.

The Eighth Circuit disagreed, finding that the banks were not clients of the firm and reversing the judgment.

One other item of note from the case was some additional conduct of concern by the firm that was unrelated to the holding of this decision. After the deal went bad, a lawsuit was filed against the investment bank. The firm was faced with the question of whether it could ethically defend the bank in the lawsuit when the heart of that case was whether the firm had given the proper advice. The firm apparently had no problem with this, and chose to represent the bank in the lawsuit. At least one court reportedly said a motive for the firm’s decision was the prospect of losing the investment bank’s business to a rival firm.